10 Concepts You Should Know Before Investing
It’s not for everyone, but check this out!We target to achieve annual cash flow yields of 5-7% or more, and overall returns of 12-15% per year – all while investing in a relatively low risk asset class. Of course, returns are not guaranteed so do your due diligence. You must be an accredited or sophisticated investor (under SEC definitions) to invest. Our minimum investment size is $50,000. You may invest additional amounts in increments of $12,500. We plan to offer somewhat higher rates of return to large investors who serve as a foundation for our business.
What assets can I Invest in?The investments are made through private partnerships holding multi-family apartment properties, A- to C+ quality grade, sizes in the range of 65-250+ units. We create a separate partnership for each property. We look for non-elevator properties with pitched roofs with full to partial utility separation. We look for A to B locations surrounded by like-kind or better assets, with the same quality of retail, entertainment, hospitality and grocery facilities. The investments are targeted for the best U.S. markets. Our current market focus is Dallas-Ft. Worth, Texas and the Salt Lake City metro area. We currently will not invest in other commercial property classes.
How do I know you can perform?While we are a new investment company, we have experience investing ourselves in five states: Utah, Arizona, Alabama, Indiana and Georgia. We have worked for the past 7 years in the real estate business, primarily as tax advisors to many successful multi-family real estate investors. We are joint venture partners with a larger investment firm that has an investor pool of over 450 accredited investors and over $100 million in multi-family assets under management. The larger firm is mentoring our business and will be checking our key work products (market selection, financial modeling, property management, contracts, financing, etc.) until we have built a more extensive track record of our own.
When will I be able to invest?We are targeting to complete our first purchase of a large multi-family property within the next few months. However, we insist on quality results so will be careful not to waste your money. Based on the track record of our investment mentor firm, only about 3% of possible deals will qualify to be acquired under our investment criteria, also due to the competitive investment space we work within. It takes patience and time to find the true wheat amid the chaff.
We plan to develop opportunities for our investors to park money with us pending our next investment, with a guaranteed, but stable, low return thereon.
Why do you invest in A- to C+ quality grade apartments?We generally will invest only in garden style apartments that have solid current cash flows, and significant appreciation potential. We have found that apartments which are in the age range of 1981-2005 embody the best prospects for improving value. Appreciation potential can be captured by improving rent collections, increasing rents, or lowering financial and operating expenses. Such improvements are hard to achieve in brand new units, and risks multiply in lower grade units because they are harder to manage and require more investment to rehabilitate.
To fully appreciate the cascading upward potential of multi-family units, please consider the following: Multi-unit apartments are priced in the market based on the ratio of indicated net operating income divided by a market-based capitalization rate. Net operating income means effective rental and other income less operating expenses, but excluding non-operating items (depreciation, loan payments and the capital improvement reserve allowance). As an example, if net operating income were $350,000 per year for a 100-unit complex, and the capitalization rate were 7%, the indicated purchase price is $5,000,000, or a cost of $50,000 per unit. If 30% of the project cost were put down on a financing loan for the project, the required raise of capital to purchase would be in the neighborhood of $2,000,000. This project would require 20 investors to purchase, assuming the average investment were $100,000.
Why are cash flows from each project and appreciation of my money likely?We extensively model our expected results, looking carefully at break-even assumptions and debt service coverage ratios, using a wide variety of key documents. Those documents include audited tax returns, three years of financial history, rental agreements and rent rolls, copies of all utility and service contracts and ad valorem tax data. We personally tour each property.
We perform extensive due diligence before acquiring any property.
We will select only the best qualified property managers for our projects to ensure effective management.
Rent price growth nationally over the past year has been about 5%, and we believe will continue at least at the underlying inflation rate over time. If rents for the hypothetical project mentioned above start at $650,000 annually and then grow by 5% the first year, the value of the project would increase by $464,000 ($650,000 times 5% divided by 7%). If operating expenses were reduced by 10%, or $35,000, then the value of the project would increase by about a further $500,000. We look for projects where these value increases are likely to occur.
What are some steps you take to protect investors?We screen our projects against an extensive list of criteria to select from among only the best U. S. statistical metropolitan areas and sub markets. Those criteria include cap rates, homeowner vacancies, housing affordability, multifamily permits, state and local political and tax environment, population size, number of multi-family projects in the area, population components, in-migration population growth, employment distribution, unemployment rates, environmental stability and predictability, income growth, unemployment rates, rental vacancy rates, and apartment building absorption rates.
Within those MSAs we look extensively at micro market criteria relevant to each housing project, such as employers, proximity to attractive services and shopping for tenants, the existence of universities and hospitals in the area, low crime, attractive school districts, the location of transportation in relation to the project, growth paths, proximity to other favorable housing projects, local government volatility and other factors.
We always remember that it is very hard to manage yourself out of a bad project location!